Does Cenit (KOSDAQ:037760) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Cenit Co., Ltd (KOSDAQ:037760) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Cenit

How Much Debt Does Cenit Carry?

As you can see below, at the end of September 2020, Cenit had ₩58.9b of debt, up from ₩51.9b a year ago. Click the image for more detail. However, it also had ₩47.0b in cash, and so its net debt is ₩11.9b.

How Healthy Is Cenit's Balance Sheet?

We can see from the most recent balance sheet that Cenit had liabilities of ₩63.3b falling due within a year, and liabilities of ₩22.4b due beyond that. Offsetting this, it had ₩47.0b in cash and ₩15.3b in receivables that were due within 12 months. So it has liabilities totalling ₩23.4b more than its cash and near-term receivables, combined.

Cenit has a market capitalization of ₩53.8b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Cenit will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Cenit had a loss before interest and tax, and actually shrunk its revenue by 13%, to ₩95b. That's not what we would hope to see.

Caveat Emptor

While Cenit's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₩10m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₩4.7b of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 5 warning signs for Cenit (2 are concerning) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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